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Deficit plan could go awry, warns IFS

By Richard Johnstone | 15 March 2012

The chancellor’s plans to reduce the deficit continue to be beset by risks, the Institute for Fiscal Studies has warned.

Photo: iStock
Addressing the fifth World Class Performance Symposium in London today, IFS programme director Gemma Tetlow said there was still a risk that George Osborne would be unable ‘to implement the spending cuts as planned’.

There was also potential for the eurozone crisis to affect the plan to plug the £114bn hole in the public finances, she added.

Tetlow told delegates at the symposium, hosted by CIPFA and the Treasury, that 80% of the deficit plan relied on spending reductions. But most of these were not yet in place and were being spread over the years to 2016/17.

There’s a risk that the government ‘won’t be able to introduce the spending cuts as planned’, she said. However, the tax rises that make up the remaining 20% had already been introduced, she added.

Tetlow was speaking after ratings agency Fitch today became the second firm to put the UK’s credit rating on negative outlook, increasing the possibility of it losing its top triple-A rating in the next two years. Moody’s changed its outlook for the UK to negative last month.

Fitch said the government’s consolidation plans were ‘credible’, and praised ‘the progress made in reducing the government's structural budget deficit’.

It also acknowledged that UK banks were ‘relatively well placed to absorb future episodes of financial market turmoil’, such as any fallout from the eurozone crisis.

However, its report added that, due to the current debt levels, there was ‘very limited fiscal space to absorb further adverse economic shocks... and a potentially weaker than currently forecast economic recovery’.

It concluded that ‘in light of the considerable uncertainty around the economic and fiscal outlook, including the risks posed to economic recovery... the negative outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon’.

A downgrade could be triggered if there was a ‘material downward revision of the assessment of the UK's medium-term growth potential’, it said.

The independent Office for Budget Responsibility is set to provide its latest forecasts for UK growth alongside next week’s Budget statement.

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